Downgrading 2 of the 4 'too big to fail' banks
The major financial institutions pass their Fed stress tests, but they don't all ace the 'buy test.'
On March 7, the Federal Reserve announced its results of mandated stress tests for the 18 largest bank holding companies. Periodic stress tests are a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Reserve's implementing regulations.
I am not going to summarize the results of these stress tests except to say that the four "too big to fail" money center banks passed their tests.
Today I am providing additional stress measures for these major money center banks based upon data from www.ValuEngine.com, weekly charts, and my proprietary models and from stock specific data available from the FDIC Quarterly Banking Profile for the Fourth Quarter of 2012.
The last time I profiled the four "too big to fail" was on Feb. 6, in TheStreet's 'Too Big to Fail' Banks Remain Buy Rated Post-Earnings. The biggest change since then is that two of the four have been downgraded to "hold" from "buy," according to ValuEngine, which implies that additional stresses are evident based upon our measures.
Overall we begin the week under a ValuEngine Valuation Warning with 65.5% of all stocks overvalued and with the finance sector 18.6% overvalued.
Bank of America (BAC) ($12.07 vs. $11.88 on Feb. 6) remains "buy" rated with the stock 6.9% undervalued with a one-year price target at $12.81. BAC opened Friday at a new multi-year high at $12.44, a level not seen since May 2011. The stock has gained 49.8% over the last twelve months with a reasonable twelve month forward price-to-earnings (P/E) ratio at 11.42.
BAC has a neutral weekly chart profile with declining momentum with the stock above its five-week modified moving average (MMA) at $11.56 and the 200-day simple moving average (SMA) at $11.73. My semiannual value level lags at $9.01 with a monthly pivot at $11.54 and annual risky level at $17.07.
FDIC data shows that BAC increased its total assets by 16.6% to $1.69 trillion in Q4 sequentially. The bank has an asset to risk based capital ratio of 9.99% up from 9.69% in Q3, which is a sign of increased stress as risk based capital is supporting assets increasing at a faster pace making this "too big to fail" bank even bigger.
Citigroup (C) ($46.68 vs. $42.92 on Feb. 6) remains "buy" rated with the stock 27.3% undervalued with a one-year price target at $50.73. Citi traded to a new multi-year high at $46.70 on Friday, a level not seen since April 2011. The stock has gained 37.3% over the last twelve months with a reasonable twelve month forward P/E ratio at 9.81.
Citi has a positive but overbought weekly chart profile with its five-week MMA at $42.90 and the 200-day SMA at $37.21. My annual value level lags at $33.19 with a monthly pivot at $45.30 and quarterly risky level at $56.11.
FDIC data shows that Citi decreased its total assets by 3.6% to $1.32 trillion in Q4 sequentially moving the bank to be the smallest of the big four. The bank has an asset-to-risk based capital ratio of 9.68% down from 9.83% in Q3, which is a sign of deceased stress as risk based capital is supporting a lower base of assets so this "too big to fail" has become slightly smaller.
JPMorgan Chase (JPM) ($50.20 vs. $48.79 on Feb. 6) has been downgraded to "hold" from "buy" with the stock 19.6% overvalued with a one-year price target at $52.26. JPM traded to a new multi-year high at $50.86 last Thursday vs. the May 2007 high at $53.25. The stock has gained 24.1% over the last twelve months with a reasonable twelve month forward P/E ratio at 9.23.
JPM has a positive but overbought weekly chart profile with its five-week MMA at $47.97 and the 200-day SMA at $40.13. My annual value levels are $44.04 and $42.87 with semiannual and monthly pivots at $46.84 and $49.88 and a weekly risky level at $51.02.
FDIC data shows that JPM increased its total assets by 9.7% to $2.03 trillion in Q4 sequentially, which is 14.0% of the total assets in the banking system, much too big a share in my judgment. No single financial institution should have control of more that 10.0% of all assets among the 7,083 FDIC-insured financial institutions. JPM has an asset to risk based capital ratio of 12.53% unchanged from 12.51% in Q3. This is another ratio that should be no larger than 10.0% in my judgment. JPM is thus a "too big to fail" bank that's dangerously too big in my opinion.
Wells Fargo (WFC) ($36.50 vs. $34.85 on Feb. 6) has been downgraded to "hold" from "buy" with the stock 8.2% overvalued with a one-year price target at $38.14. WFC traded to a new multi-year high at $36.62 on Friday a level not seen since October 2008. The stock has gained 16.2% over the last twelve months with a reasonable twelve month forward P/E ratio at 10.13.
WFC has a positive but overbought weekly chart profile with its five-week MMA at $35.34 and the 200-day SMA at $29.43. My annual value levels are $34.17 and $32.82 with a monthly pivot at $35.06 with no risky level versus the September 2008 high at $44.67.
FDIC data shows that WFC increased its total assets by 9.0% to $1.33 trillion in Q4, sequentially moving up to being the third largest of the big four banks. WFC has an asset to risk based capital ratio of 10.15% unchanged from 10.18% in Q3. WFC is another "too big to fail" bank that's even bigger.
Wells Fargo has the largest exposure to construction & development loans (C&D) at $17.28 billion. While this is nowhere near an overexposure versus risk based capital, it represents 8.5% of the total C&D loans in the banking system.
At the time of publication the author had no position in any of the stocks mentioned.
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But so far the FDIC has been able to recover only $787 million of the $92.5 billion lost to bank collapses between 2007 and 2012. The revelation comes just days after U.S. Attorney General that some banks are simply too big to prosecute without hurting the broader economy. Instead, U.S. regulators have repeatedly to major banks over allegations such as money laundering, mortgage fraud and , while against either banks or individual bankers.
The TBTF banks including BAC, C and JPM are liars and crooks and smarter then those that are supposed to regulate them. They will do anything to make a profit including fraud and criminal acts.
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